Expats to benefit from South Africa’s new tax plans

South Africa plans to reduce corporate taxes and increase the exemption on foreign income earned by expatriates in a bid to attract investments and stem the emigration of high-earning citizens as revenue collections falter.

Sluggish economic growth has led to tax revenue undershooting estimates, with the shortfall forecast at R63.3 billion ($4.2 billion) for the year ending March 31, the National Treasury said in the Budget Review Wednesday. That’s R10.8 billion more than the gap forecast in October.

The government’s efforts to bolster revenue by raising levies on personal income, dividends, capital gains and value-added tax over the past five years have failed to arrest the debt trajectory, the Treasury said.

“Higher levels of economic growth are required for further tax increases to be effective in consolidating the public finances or financing additional expenditure.”

South Africa plans to reduce its corporate-income tax rate of 28% over the medium term to boost the country’s competitiveness as an investment destination among emerging markets, while dissuading companies from “profit shifting,” the Treasury said.

Corporate taxes account for 16% of government revenue.

It won’t increase direct taxes on individuals, rolling back on a 2019 pledge to aid fiscal consolidation by collecting R10 billion in additional revenue. It plans to raise R1.58 billion in fiscal 2020-21.

While the government considered proposing tax increases, it decided against it due to “the weakness in the economy,” the Treasury said.

Key tax proposals:

  • The government aims to curb tax avoidance measures by multinational companies by capping the interest-cost deductions at 30% of earnings from 1 January;
  • It also intends to broaden the corporate-income tax base by restricting the offset of carried-forward losses to 80% of taxable income;
  • The government will not extend tax incentives for special economic zones beyond the approved six zones, and will introduce sunset clauses for incentives linked to airport and port assets, rolling stock and loans for residential units;
  • The exemption threshold on foreign income earned by South African taxpayers will be lifted to R1.25 million from R1 million. The levy, which has prompted many high-earners to end their local tax-residency status, is due to take effect 1 March ;
  • The government has also repealed restrictions on investments, banking and borrowing in South Africa by emigrants, so that emigrants are treated equally to residents;
  • Personal income tax relief through a 5.2% adjustment in all tax brackets. That’s above government’s inflation forecast and is estimated to provide R2 billion of tax breaks;
  • The threshold for paying transfer duties on the sale of property will increase to R1 million from R900,000;
  • A 2.8% increase in the value of medical tax credits, which is lower than inflation so as to fund the rollout of the National Health Insurance over the medium term;
  • An increase in the limit on contributions to tax-free savings accounts to R36,000 from R33,000;
  • The fuel levy will increase by 0.16 rand per litre and the Road Accident Fund levy by 0.09 rand;
  • Excise duties on alcohol and tobacco raised by 4.4% to 7.5%, adding about R1.3 billion.

Read: South Africans are looking to break their tax-link ahead of controversial changes for expats

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Expats to benefit from South Africa’s new tax plans